Leonard Gleason - Investor Relations Chris Martin - Chairman, President & CEO Tom Lyons - Executive Vice President & CFO.

Matthew Breese - Piper Jaffray.

Welcome to the Provident Financial Services Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Leonard Gleason, Investor Relations Officer. Please go ahead..

Think you Austin. Good morning ladies and gentlemen. Thank you for joining us this morning. The presenters for our third quarter earnings call are Chris Martin, President, Chairman and CEO and Tom Lyons, our Executive Vice President and Chief Financial Officer.

Before beginning a review of our financial results we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today's call.

Our full disclaimer can be found in the text of this morning's earnings release which has been posted to the Investor Relations page on our website provident.bank. Now I'm pleased to introduce Chris Martin who will offer his perspective on our third-quarter financial results.

Chris?.

Thank you, Leonard and good morning to everyone on the call. Providence record earnings of $22 million and strong EPS results for the quarter of $0.36 versus $0.33 for the same period in 2015 exemplify our consistent performance in extremely competitive conditions.

Net interest income achieved record levels again and strong measured growth on both sides of the balance sheet continued. Our loan portfolio grew by an annualized 6.5% for the quarter as we continue to experience strong origination volume without sacrificing credit structure accompanied by lower prepayments.

Our loan pipeline is skewed toward commercial loans and lines of credit while C&I business is experiencing more competition as many competitors have pivoted from CRE to C&I. As regulatory scrutiny of CRE exposure has impacted our industry we have CRE addition we have seen CRE pricing and deal structures improve.

And as we get closer to $10 billion in assets, we will continue our selective approach to loan growth and have deemphasized lending that has minimal potential for relationship building. Our deposit growth of 10.2% for the first nine months has supported our organic asset generation and reduced the need for wholesale borrowings.

Core deposits represent nearly 90% of total deposits and our loan to deposit ratio is now at a very comfortable 105%. Average non-interest bearing deposits were up 7% for the year today.

And we're also educating our commercial clients about the benefits of our corporate cash management tools which rivaled the money center banks and further and improve and expand our customer relationships.

And as for the Wells Fargo impact, we can confidently state that our sales and service process fees are thoroughly vetted, incentive plans are well-designed and appropriate controls are in place to ensure that our team operates in a manner consistent with our code of conduct which support the customer needs first culture.

Net interest margin compression continued at a level that was magnified by excess liquidity garnered from several new deposit relationships that was not completely deployed until the end of the quarter. This excess liquidity accounted for about 3 basis points of those short-term margin compression.

Many including us anticipated a Fed move [ph] in December of 25 basis points which will not materially impact the Company.

We do not anticipate such an increase will have an immediate impact on deposit cost but we will be mindful of competition of less elasticity in the deposit funding mix and need to maintain deposit levels to support the liquidity and loan pipelines.

We have been originating commercial loans with adjustable rate features and/or shorter duration which should mitigate increased funding costs associated with an eventual interest rate rise. Nonetheless the prognostications for rates staying lower for longer [indiscernible].

Net interest income expected to be up modestly next quarter on continued low growth and investment of the previously noted excess liquidity. Credit performance remains strong and given the underlying quality and mix of our loan portfolio we expect credit quality to remain stable with provisioning as needed in conjunction with loan growth.

Annualized net charges for just five basis point of average loans for the quarter and we're not experiencing any adverse credit trends. With that said, the credit cycle has been in this improving position for an extended period of time and we remained vigilant of any signs of weakness.

Costs including regulatory, compliance, AML and audit processes continue to increase including preparation for the $10 billion plateau while we're keeping a tight lid on operating expenses we’re putting some savings back into our mobile and digital platforms with enhancements to our bill pay and cyber security controls for customers.

We're focused on improving the connection to our clients for ease-of-use yet maintaining security and confidentiality that is not obtrusive.

Having our efficiency ratio below 60% is extremely important to us and as Wealth Management as a percentage of fee income increases and regulatory costs including those associated with $10 million hurdle are anticipated it does take a lot of effort to stay below 60%.

Our return on average tangible equity for the quarter was 11.1% and we had the capital to lever when and if the opportunity presents itself. With all the challenges the industry is facing activity on the M&A front continues and consolidation in the industry will not stop short term.

The Wealth Management space is also under pressure with new DOL rules and registered investment advisor stated to shift their business line approach which we believe BOEs well for opportunities expanding Beacon trust. We evaluate any bank and wealth M&A opportunity with the same discipline.

Accretion earnings, limited dilution to book value, reasonable earn back and the quality, culture and talent of the organization on a combined basis.

On the economic front the local economy in our market continues to grow at a measured pace, the clients remains somewhat reticent on near-term business prospects and are still holding off on significant capital expenditures until certainty about tax policy, healthcare costs and regulatory overrate abates at some level predictability returns.

Once the election is over Washington can attempt to get back to work on fixing the many challenges the USA bases since. With that Tom will go over some more of the details..

Thank you Chris and good morning, everyone. As Chris noted our net income for the third quarter was $22.9 million, a 7.3% increase from $21.4 million for the trailing quarter. Earnings-per-share was $0.36 compared with $0.34 for the early quarter.

Revenues increased $1.3 million with net interest income increasing $1.1 million as average earning assets increased by $225 million more than offsetting compression in the net interest margin to 3.05%. A portion of this margin compression was due to excess liquidity held during the quarter which has been deployed as of quarter end.

We anticipate 0 to 3 basis points of further compression in the fourth quarter. Average loans grew at 8.5% annualized pace with 6.5% annual loan growth on a spot basis. Loan growth was driven by CRE, C&I and construction lending. This growth was funded by $285 million or 21% annualized increase in average core deposits.

Average interest-bearing demand savings and noninterest bearing deposits all increased during the quarter. Deposit growth during the quarter reflected funding from several new municipal relationships as well as new and deepening commercial deposit relationships.

Non-interest income was $242,000 greater than in the trailing quarter as increases in certain less predictable items such as gains on loan sales, swap income and REO sales more than offset decreases in loan prepayment fees, lower seasonal tax preparation fees at Beacon Trust and nonrecurring gain on the sale of deposits recorded in the trailing quarter and lower non-deposit investment product sales income.

We provided $1 million for loan losses this quarter a decrease from $1.7 million in the prior quarter as the impact of further improvements in asset quality mitigated the provision required for portfolio growth. Net charge-offs were $845,000 on an annualized five basis point of average loans.

Nonperforming loans decreased $3 million from the trailing quarter to $40 million or 0.58% of total loans. Criticized and classified balances fell to 1.8% of total loans and totaled delinquencies declined to 90 basis points.

The allowance for loan losses total loans declined slightly to 89 basis points at September 30 from 90 basis points at June 30 excluding acquired loans recorded at fair value the allowance was 0.94% of loans.

Noninterest expense decreased by $47,000 from the trailing quarter to 45.9 million as decreased direct to stock compensation, intangibles amortization, NPA related expenses, consultant fees and advertising costs were largely offset by increased incentive accruals, legal and occupancy costs.

Income tax expense increased in the trailing quarter to $9.3 million as a result of growth in pretax income however our effective tax rate increased slightly to 28.8% from 29.1%. We early adopted ASU 2016-09 in the current quarter.

Reducing tax expense for recognizing current year-to-date benefit related to stock-based compensation of $252,000 in the third quarter. We currently project an effective tax rate of approximately 29.5% for the fourth quarter of 2016. That concludes our prepared remarks. We would be happy to respond to questions..

[Operator Instructions]. And our first question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead..

This is Nick filling in for Mark. First you were able to hold the line on expenses this quarter.

How are you thinking and expenses in 4Q and into next year?.

I think will still be about $45 million next order, as well..

Okay. Secondly, really nice quarter positive growth again this quarter. I was wondering if you could talk about deposit pricing in your markets and how you're able to consistently make headway here..

Certainly has been a mindset that we're doing more -- not less transactional business and more relationship building. Our loan group has done a great job of going back to our clients and been able to gather more of that business in the past it was more of just get the loan on the books.

Now we go back to the relationship with corporate cash management products and certainly we can compete with a large money center bank's with a more customized approach. We consider everybody's goals and objectives really is about core deposit growth. Everybody works together both the retail team and our lending team work hand-in-hand.

So I think it really comes back to building our relationships and doing less transactional business. Just from a pricing perspective, we've always not been a large player in the CD market. We just have approximately 10% in CDs. We don't think the pricing pressure will abate after rates go up.

I'm sure there will be competition starting to do some interesting money market type of transactions. So for the most part, I think it's just our block and tackle approach to working with the customer to find out the best solution which has translated into opportunities that have helped our deposit growth..

And then Chris I was hoping you could expand on your opening remarks regarding the competitive environment.

You mentioned that deal structures and pricing have improved as a result of the regulatory pressures, are there specific geographies in your footprint that had seemed particular improvement or is it very broadbased?.

I would say it's been broad-based more New Jersey than Pennsylvania, certainly the competition in our markets here have been because of the a lot of the over capitalized converted and/or people just trying to put money to work. Everybody was kind of giving up on some credit issues that we didn't.

The extension of terms was something that we didn't like to see. We've tried to keep the duration shorter.

I think everybody wants the OCC and everybody start talking about CRE, everybody took a look at the risk-adjusted rate of return on those and said we should be getting paid a little more and I think the idea of having a portfolio of CRE over 300% for long period of time has allowed us to develop a great relationship with our regulators that we know how to review and analyze the risk attached to that.

So I think from a pricing perspective, long-winded way of saying everybody -- when the regulator say said you've got to look everybody kind of comes in on pricing. .

[Operator Instructions]. Our next question comes from Collyn Gilbert with KBW. Please go ahead..

Chris O'Connell [ph] filling in for Collyn.

So I was just wondering if you guys could expand a little bit more on some of the seasonal changes in the fee income and if whether you guys expect the strength to continue at these levels?.

We had some pluses and minuses in those less predictable items. Prepayment fees were down for us which was a good thing in terms of earning asset size, 445,000 for the current quarter versus 991,000 in the trailing quarter. We saw a nice pickup in gains on loan sales about 1.2 million, 1.3 million versus 384,000 in the trailing quarter.

A lot of that was SBA loan sales, that pipeline has diminished. I don’t think we're going to see that level of gains in Q4. We have nice pipeline of loans closing but we’re probably not going to be salable until Q1 of 2017 so I expect to see little decrease in the gain on sales of loans next quarter.

Swap profit was good and again we have some pipeline there so that could hold up pretty well for us. We have $544,000 net profit on swaps this quarter versus $284,000 in the trailing quarter. The other unusual items are things like gains on sales of REO [ph] $419,000 this quarter versus $218,000. So those are little bit more challenging to predict.

We have some sales in the pipeline but there's a lot of things at work there..

It sounded like you guys saw -- pretty unusual effect at least immediately assuming a rate hike in December.

Could you talk a little bit maybe what the NIM going in progressing through '17 would look like with or without a rate hike?.

Either way we’re fairly neutral. I think a rate hike actually helps us a little bit, I know when you look at our disclosures we show liability sensitivity.

We're pretty conservative I believe in our deposit beta modeling which is probably the primary driver that we use at 58% deposit beta [ph] in our modeling but if you want to go to last year's rate hike I think the actual beta was probably less than five basis points.

I don't see a lot of impact from a short small increase if we get one in December on funding cost series. We had a little bit of pickup from LIBOR over the course of this year's as did other folks I think about 20% of our CRE portfolio is LIBOR-based. So generally speaking I think it helps us a little bit..

And then finally just any difference or change in your guys mentality towards crossing $10 billion in terms of cost building for next year, timing and I think you guys may have mentioned organically 2018 before or M&A opportunities?.

I think we still the same in terms of timing on an organic basis. We continue to refine our cost estimates.

Those have actually come in a little bit in terms of this year I think we are giving high number before it's about 250, it looks like for 2016 and about $2 million, 250,000 for 2016 and $2 million in 2017 expected in terms of cost for implementation..

Our thought process certainly would be to have the regulators and the legislation looked at a little bit and I think it's kind of what a lot of the midsize banks are trying to speak in Washington about including a lot of our regulators that agreed the threshold of $10 billion is a little bit kind of a line in the sand that was made under stressful conditions.

We're hoping that some of the pans out but in between we're always conscious of that. We don't really hold back on the reins of growth. Were always just being prudent pricing wise and growth wise that we would always be. We would not do a deal just to go over. We would do a deal just that make sense for the Company..

And our next question is from Matthew Breese with Piper Jaffray. Please go ahead. .

I just wanted to touch on the commercial real estate industry especially in New York City where there are folks over that concentration. How has it changed in terms of rates and terms? I was hoping you could provide some specific examples where things have become a bit more rational..

Well first and foremost we don’t do a lot in the boroughs at all. And we don't utilize most of the broker business so that being said from a pricing standpoint, I would think that over the past since this has come up from a regular standpoint rates are up about 25 basis points overall.

I think it's rational pricing, I think the deal structure that we have looked it's more of the people that have been in this business a long time that we have a relationship with as opposed to growth of people that we don't bank with on a normal basis.

We've looked at multifamily and certainly in certain markets that we think are not necessarily overheated but we have enough exposure and/or we see enough that we say we will pull back a little bit depending on that market specifically.

We follow our borrowers wherever they plan on going whether it be something in Eastern Pennsylvania or towards the mainline in Philadelphia. We have no problem following our clients..

Do you foresee any sort of opportunities on the portfolio side as folks pull back? Will there be any portfolio sales that you could take a look at? Have you seen anything like that?.

I have not seen a portfolio coming out of this point from a series standpoint we're seeing enough growth from where we stand I think the industrial market has picked up a bit, we like that area and so I think we have enough of her own organic appetite as opposed to buying portfolios.

I would think if we're looking at that way we would look at it why wouldn’t they be selling the entire Company as opposed to just the portfolios..

This concludes our question-and-answer session as well as today's conference. We thank you for attending the presentation, and you may now disconnect..